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# Operating Assets – Expense and Disposal

## Key Things To Know

Depreciation:
Expense the cost of the property, plant, equipment over the period it is used to produce revenues (follows the matching concept)

Residual or Salvage Value:
Estimated sales price when you are done using it

Depreciable Cost or Base (also called Allocation Base):
Cost – Residual Value

Estimated Useful Life:
The number of years the company expects to USE the asset

Methods of Depreciation:

Straight-line:

Cost – Residual Value / Useful life in years

Sum of Years Digits:

Cost – Residual Value
x (Useful life ** / total years)

** useful life reduces by 1 each year until it hits 0

Double Declining Balance:

100% / useful life X 2 = % X Book Value

Book Value = Cost – Accumulated Depreciation (changes each year)

Units of Production:

 Costs – Residual Value Total Estimated Units = \$ cost per unit

then: \$ Cost per unit x units produced this period = expense this period

Journal entry for all methods of depreciation:

 Depreciation Expense                      \$XXXX             Accumulated depreciation           \$XXXX

Depletion of Natural Resources

 Depletion Base (Total Cost – Residual Value) Total Estimated Units

= \$ per unit X units recovered this period = depletion expense

 Depletion Expense    \$XX              Asset                         \$XX or Inventory                   \$XX              Asset                        \$XX Cost of Goods Sold  \$XX                Inventory              \$XX

Amortization of Intangible Assets:

Straight-line is generally always used

 Amortization Expense           \$XX              Accumulated Amortization       \$XX                  (or the asset name)

Partial Period Expense:

Record a partial year expense when assets are not used for the full year

Annual expense
x Months used / 12
= Expense for the period

Changes in estimated useful life or costs added to the asset begin use

Change the depreciation calculation to expense the total cost over the future estimated total time plan to use the asset.

Re-compute depreciation expense for future years using the book value on the date of change:

 Total Cost: original cost + added costs – Accumulated depreciation to date of change = Current book value

then

 Current Book Value – New Residual Value New useful life from here on

= new depreciation expense each year going forward

Impairment Loss: Permanent Loss of future benefit

Tangible assets with finite life

1st Compare book value to undiscounted future cash flows
If book value is more than impairment has occurred, go to step 2

2nd Book value – Fair market value of the asset = Impairment Loss

Indefinite life other than goodwill

Book value – fair market value = the impairment loss

Goodwill

Goodwill arises from an operating unit and is not an asset in itself

1st Compare the book value to fair market value of net assets of the operating unit.
If book value is more than impairment has occurred, go to step 2

2nd Compare book value to the implied value of goodwill
Impairment loss if book value is more than implied value

(Implied value = purchase price – fair market value of net assets)

Assets held for sale

Book value – Fair Market Value – Cost to Sell = Impairment

Retirement and Sale of the Assets

Follow these steps to record the sale of any long-term asset:

1) Record the cash you receive as a debit.

2) Credit the asset you are selling for the original total cost

3) Debit accumulated depreciation for the total to the date sold
Record depreciation expense for the part of the year the asset was used.

4) Record a realized gain or a loss to make the journal entry balance

Journal entry

 Realized Loss on Sale ** Cash Accumulated Depreciation              Asset              Realized Gain on Sale **

** Use only one debit or credit. Plug to gain (need credit) or loss (need debit) to balance the journal entry